Economic environment definition

The economic environment relates to all the economic determinants that influence
commercial and consumer compliance. The term economic environment indicates all
the external economic circumstances that affect the purchasing practices of customers
and markets. Hence, it influences the production of the business.

“The term economic environment refers to all the external economic factors that
influence buying habits of consumers and businesses and therefore affect the
performance of a company.”

“These factors are often beyond a company’s control, and may be either large-scale
(macro) or small-scale (micro).”

Economic environment – factors

The economic environment consists of microeconomic and macroeconomic factors.

Microeconomic factors
The microeconomic environment refers to things that happen at the individual company
or consumer level.

Microeconomic factors do not affect the whole economy. Below are some
microeconomic factors that may influence a business:

 Competitors.
 Demand.
 Market size.
 Suppliers.
 Supply.
 How you supply your goods, i.e., the distribution chain. For example, through
retail stores, distributors, the Internet, etc.

Macroeconomic factors
The macroeconomic environment, on the other hand, refers to things that affect the
entire economy. Macroeconomics is concerned with general or large-scale economic
factors, such as:

 Unemployment
 Inflation.
 Interest rates.
 GDP growth. GDP stands for Gross Domestic Product. In other words, is the
economy in recession, is it booming, etc.?
 Taxes.
 Exchange rates, i.e., how much currencies are worth in relation to one another.
 How much discretionary income consumers have, i.e., income after paying tax,
social security, etc.
 Levels of consumer confidence.
 Savings rates.

Business people cannot control their economic environment. However, they can
evaluate conditions in the marketplace before deciding whether to proceed with a plan
or project.

In this context, the term ‘marketplace‘ means the same as ‘market‘ in its abstract
sense.

As a component of economic reformations, the government of India declared a new

industrial system in July 1991. The extensive characteristics of this system were as
follows:

 The government decreased the number of enterprises below mandatory licensing to six.
 Many of the businesses held for the public sector under the initial policy were justified. The
purpose of the public sector was defined only to four industries of vital importance.
 Disinvestment was conducted in case of many public sector industrial companies.
 The policies towards foreign funds were expanded. The percentage of foreign equity
partnerships was extended. In many ventures, 100 percent of foreign direct investment (FDI)
was allowed.

Liberalisation
 By eliminating the licensing terms in most of the industries, excluding a shortlist
 By providing freedom in determining the range of marketing activities, i.e., no constraints on
the development or consolidation of business pursuits
 By dismissing the restraints on the transportation of commodities and services
 By providing freedom in deciding the cost prices of commodities and services
Privatisation

The new set of economic changes intended at proffering a prominent position to the private
sector in the nation-building rule and a diminished role to the public sector.

the administration redefined the role of the public sector in the new industrial policy of 1991,
approved the policy of proposed disinvestments of the public sector, and determined the loss-
making and weak industries to the Board of Industrial and Financial Reconstruction (BIFR)

Globalisation
Globalisation implies the combination of different economies of the world heading
towards the development of a united (closely-knitted) global marketplace. Till 1991, the
government of India had followed a course of stringently controlling imports in terms of
price and quantity. These laws were with respect to the following:

 Licensing of imports
 Tariff limitations
 Quantitative constraints

The new economic reforms directed at business liberalisation were focused towards
import liberalisation, export improvement through rationalisation of the tax structure, and
changes with respect to the foreign exchange so that the nation does not remain
separate from the rest of the world.

Technological environment refers to the changes in the output,

production methods, use of equipment and quality of the product. It
includes force related to scientific innovations and improvements in
products as well as production technology.
For example, with recent improvements in technology and
computerisation, marketing and selling of products is now possible
online leading to increase in sales and output of many firms.

. Why is the technological environment important?

Flexibility and responsiveness in adapting to new technologies are essential.
Early adopters often achieve a higher market share and earn higher returns.
They scan trends and technological changes to map potential opportunities
and threats, including their impact on the competitive landscape.

Several reasons explain why the technological factor is important. Let’s take
three reasons.

First, technological changes have brought new business models and made
old ones irrelevant. A good example is how e-commerce replaces the “brick-
and-mortar” business model.

Second, new technologies contribute to changes in production processes. It

is not only related to more advanced machines and equipment. But, it also
stimulates companies to develop new, better techniques because technology
often makes what was once impossible possible.

Computer Aided Manufacturing (CAM) is an example.

Third, technological changes advance communication channels. Information

technology contributes to reducing operating costs and time, operating
efficiency, and becoming a critical managerial tool in business decision-
making.

For example, email allows companies to send messages to suppliers instantly

without going through the mail. The Internet has made it possible for
businesses to adopt the official business concept.

How technology factors impact the business

Technological changes not only affect products and how they are marketed.
But, it also affects business in several ways.

Product selling techniques. For example, more stores are turning online.
The change had a significant impact on their sales strategy.

Product manufacturing method. For example, automation through robotics

and computer-assisted machines replaces human hands.
Market research. Advances in technology gave rise to what we call big data.
Marketers find it easier and more accurate to analyze the market with
database systems because they can access more data, enabling them to plan
their marketing better.

Company management and operations. For example, the Internet and

electronic devices have led to remote working, such as working from home, as
a common practice today. So, employees do not need to come to the office to
work. Instead, they can do it at home, as long as they are connected to the
Internet.

Changing consumer needs and wants. For example, buying a data

package for communication services is a new need for consumers because
they must stay online daily.

Changing consumer behavior. For example, the Internet makes consumers

more price-conscious because they can easily and inexpensively compare
products without physically seeing them.

Bring up new competitors. Technology gives rise to competitors with new

business models. E-Commerce is a good example.

Examples of how technological change is

transforming business
Big data allows companies to access more accurate data, which enables
them to plan and make better decisions.

E-Commerce allows consumers to shop anywhere and anytime via their

smartphone. It saves them cost and time.

For example, they no longer need to visit a retail store. In addition, they find it
easier to compare prices between products, reducing switching costs and
strengthening their bargaining power.

3D printers allow us to quickly create models and product prototypes. We can

also use them to make jewelry, tools, and toys.
Social media changes the way consumers interact with others. Moreover, it
facilitates them to disseminate information more quickly, cheaply, and
massively. For example, companies use it to stay connected with their
consumers.

Social Environment

 Social Environment consists of social forces like traditions, values, social trends, level of
education, the standard of living etc. All these forces have a vast impact on business.

 Tradition: It refers to social practices that have lasted for decades, such as Ugadi,
Deepavali, Id, Christmas,etc.,

 Impact: More demand during festivals provides opportunities for various businesses.

 Values: It refers to moral principles prevailing in the society, such as Freedom of choice in
the market, Social Justice, Equality of opportunity, Non-discriminatory practices etc.

 Impact: The organisations that believe in values maintain a good reputation in society and
find ease in selling their products.

 Social Trends: It refers to a general change or development in the society, such as health
and fitness trend among urban dwellers.

 Impact: Health and fitness trend has created demand for gyms, mineral water etc.

Examples How Social Factors Affect

Business
Pepsi Company. Research has shown that social factors have
greatly impacted the beverage company. Why? Perhaps because
Pepsi is a non- alcoholic beverage. So, it has to maintain the sharp
differences in cultures around the world.

For example, the religious festivals featured in TVC advertisements

vary based on cultures and their social factors. Pepsi has to value
and indulge in all the festivals and relate itself to the market.
Reacting towards social factor can help Pepsi Co to cash the
opportunity.

What is Cultural Environment?

Cultural environment is a business concept which helps to understand the customs and
collective beliefs of a set of people or society based on their culture, religion, region,
nationality, language etc.
The study of social hierarchy, social norms and customs, regional / religion based
groups and their behavior helps us to understand the cultural environment of a place.
This helps a marketer to position the products appropriately.

Components of Cultural Environment

There are many elements which need to be evaluated to understand the socio-cultural
environment. The key factors which define the culture, customs and beliefs of a group of
people or society are as follows:
1. Nationality
The values, history and beliefs of every country defines the cultural environment
amongst the citizens of a country.
2. Religion
Religious practices and beliefs defines various factors on how a business should
operate and communicate as it must be accurate about religion as well as be careful of
handling sensitive issues.
3. Language
The preferred language or mother tongue of a region, town, city, state or country can
define the cultural environment.
For example, in Canada, labels must be in both English and French. In India, there
are over 200 different dialects, and a similar situation exists in China.

4. Region
Regional factors like geography, terrain, climate etc. also creates a collective group or
segment of people which marketing firms can address to.
5. Demographics
Age, gender, marital status etc. also define cultures, beliefs and attitude of people.
6. Education
Cultural environment is also classified and segmented based on education, social
status, income levels etc.

What is a demographic environment?

Demographic environment is a term that marketers use to describe the characteristics of a
population. It can be used as an indicator of how successful or unsuccessful your business may be.
The three main factors that make up the demographic environment are:

– size

– age

– location

Each of these factors can have a significant impact on the success of your business. For example, if
you’re a pizza parlour in a busy city centre with lots of foot traffic, you’ll likely do better than if you
were located in a remote rural area.

It is also used as an indicator of how well a product will sell. A company that wants to launch a new
line of baby clothes, for example, would want to research the size and age of the population to
determine if there is a market for their product.

Finally, it can be used to understand how people are spending their money. If you’re launching a
new product, but the demographic environment shows that people aren’t buying as many clothes or
shoes as they used to, then it might be time to change your pricing strategy.

Impact of size in marketing

As businesses grow, they often focus on their target markets to ensure that their products and
services are reaching the right consumers. The demographic environment can impact how a
business markets its products and how successful it is in reaching its target market. The size of the
population can affect what types of marketing strategies a business uses.

Impact of age in marketing

Age is one of many factors that can affect the success of a business. The demographic environment
can impact businesses in several ways, including how much money consumers have to spend and
 what they choose to buy. In this article, we will look at how age affects businesses and what age
groups have the most purchasing power.

Impact of location in marketing

The location has an impact on marketing as it d determines a lot of things like the population density,
language spoken, literacy rate etc. It helps us to determine the needs and wants of people in the
area.

Advantages of the demographic

environment on business and commerce
The demographic environment has many advantages for business and commerce. It is important to
know these advantages to understand how it works and how it affects the market.

1. The first advantage is that the demographic environment helps businesses understand their
customers. This information can be used to improve their product or service.
2. By knowing what demographics are most interested in their product, businesses can focus on these
groups and create a marketing strategy that appeals to them.
3. Another advantage is that it can help companies make decisions about where they should place
their advertisements.
4. For example, if a company wants to target young women with high-income levels, then it would be
wise to place ads in magazines that these women read.
5. Finally, the demographic environment can help businesses understand the competition. This
information can be used to create a plan that beats the competition
6. . For example, if a company knows that their main competitor is targeting young men with low-
income levels, then it would make sense for them to create an advertising campaign that targets
young men with high-income levels.

Disadvantages of the demographic

environment on business and commerce
The disadvantages include:

1. Population ageing: An increased number of retirees will reduce the workforce and consumer
demand, as well as strain social security and health care systems.
2. Declining birth rates: A shrinking population will reduce the number of consumers and producers in
the economy.
3. Shifting ethnic demographics: Changes in the ethnic makeup of a population can create tension and
conflict, as well as new opportunities and challenges for businesses.
4. Urbanisation: An ever-increasing proportion of the population living in urban areas will create
significant economic, political and environmental challenges.

Political Environment is the state, government and its institutions and legislations
and the public and private stakeholders who operate and interact with or influence
the system. The political atmosphere should be good and very stable for a firm to
operate successfully. Political Environment forms the basis of business environment
in a country.
If the policies of government are stable and better then businesses would get
impacted in a positive way and vice versa. Changes in government often results in
changes in policy.
Various Political Environment related Factors & Elements
There are various factors which affect political environment:
1. Stability
This is one of the most important factors. The stability of political environment is very
conducive to the economy and business in general.
If a country is not stable and government keeps changing frequently, the country can
never be economically stable as well. The GDP, stock exchange index all would go
down leading to a vicious circle.
2. Taxation
The taxation regime is very important when it comes to political environment. If a
government is balanced in terms of tax and budge, the companies are motivated to
produce more and grow.
3. Foreign Policies
Political Environment should also balance the foreign investments and growth in a
particular country.
If there is no foreign investment, growth and technical knowledge can be issues but if
there is too much foreign investment inflow then it can lead to loss of domestic players.

Examples of political factors

What variables do we need to look at when analyzing political factors? Here
are some details:
 Political system stability
 Political program
 Leadership change
 Law enforcement commitment
 Corruption
 Regulations and Policies
 Bureaucracy
 Press freedom
 Privatization or nationalization
 Deregulation

Legal Environment


 It includes various laws passed by the government,

administrative orders issued by government authorities,
court judgments as well as decisions rendered by the
central, state or local governments.


 Understanding of legal knowledge is a pre-requisite for

the smooth functioning of business and industry.


 Understanding the legal environment by business

houses help them not to fall in a legal tangle.


 The legal environment includes various laws like

Companies Act 2013, Consumer Protection Act 1986,
Policies relating to licensing & approvals, Policies
related to foreign trade etc.
Example: Labour laws followed by companies help them to keep
away from penalties.

Environmental Scanning Definition

The process of collecting, evaluating, and delivering information for a strategic
purpose is defined as environmental scanning. The process of environmental
scanning requires both accurate and personalized data on the business
environment in which the organization is operating or considering entering.

What are the Characteristics of Environmental Scanning?

The characteristics of environmental scanning are as follows:
1. Continuous Process- The analysis of the environment is a continuous
process rather than being sporadic. The rapidly changing environment has
to be captured continuously to be on track.
2. Exploratory Process- Scanning is an exploratory process that keeps
monitoring the environment to bring out the possibilities and unknown
dimensions of the future. It stresses the fact that “What could happen” and
not ”What will happen”.
3. Dynamic Process- Environmental scanning is not static. It is a dynamic
process and depends on changing situations.
4. Holistic View- Environmental Scanning focuses on the complete view of
the environment rather than viewing it partially.

Techniques of Environmental
Scanning
Different techniques of environmental scanning are
described below:
. Environmental Threat and
Opportunity Profile Analysis (ETOP)

2. Quick Environmental Scanning

Technique Analysis (QUEST)

QUEST is an environmental scanning technique that is designed to

assist with organizational strategies by keeping adheres to change
and its implications. Different steps involved in this technique are
as follows:
 The process of environmental scanning starts with the
observation of the organization’s events and trends by
strategists.
 After observation, important issues that may impact the
organization are considered using environment appraisal.
 A report is created by making a summary of these issues and
their impact.
 In the final step, planners who are responsible for deciding the
feasibility of the proposed strategy, review reports.

3. SWOT Analysis
Strengths: The strength of any organization is related to its core
competencies i.e. efficient resources or technology or skills or
advantages over its competitors.
For example, the marketing expertise of a firm can be its
strength. Apart from this, an organization’s strength can be:

 Strong customer relations
 Market leader in its product or services
 Sound market image and reputation
 Smooth cash-flows

Weaknesses: A weakness or limitation of an organization is

related to the scarcity of its resources or skill-set of staff or
capabilities that creates an adverse effect on its performance.

For example, limited cash-flow and high cost are considered as a

financial weakness of the organization. Similarly, other weaknesses
can be:
 Poor product quality
 Low productivity
 Unrecognized brand name or poor brand image
External environment
analysis/scanning
Different factors that are considered while scanning the external
environment of the organization like Competitors, customers,
suppliers, technology, social and economic factors, political and
legal issues, market trends, etc.

Opportunities: An opportunity of the organization’s environment

is considered as its most favorable situation. These are the
circumstances that are external to the business and can become an
advantage to the organization. For

example, different opportunities for a firm can be:

 Social media marketing
 Mergers & acquisitions
 Tapping new markets
 Expansion in International market
 New product development

Threats: Threats of an organization are current or future

unfavorable situations that may occur in its external
environment. For example, below are a few major threats for a
firm:
 A new competitor in the market
 The slow growth of the market
 Changing customer preferences
 Increase in the bargaining power of consumers
 Change in regulations or major technical changes

4. PEST Analysis
PEST technique for a firm’s environmental scanning includes
analysis of political, economic, social, and technical factors of the
environment.